Counting under COVID’s Rules: An in-depth look at the budget uncertainties to come
Budget managers get used to moving targets, continuous adjustment
The county’s planners are learning to manage the unmanageable, as they put the final touches this week on a budget introduced in March and immediately upended by the worst pandemic to hit the United States in a century.
“Every year this is like hitting a moving target, but this year the target is on fire,” Board of Supervisors Chair Christine Smith said at a recent meeting on the budget for Fiscal Year 2021, which begins in July.
Increasing worry about a big revenue hit
While many of the county’s revenues are looking shaky, there is increasing worry that the county’s largest source of revenue — private property taxes and real estate taxes — will suffer as the lockdown pushes enterprises of all types into contraction or closure. Debts, mortgages, obligations to employees and suppliers may make it impossible for some county residents to pay their property and real estate taxes in December, when they are due. And because these account for more than 70 percent of the revenue the county takes in, even minor reductions in tax receipts will require significant cuts in spending.
County Administrator Garrey Curry calculates that for every one percent drop in the collection rate for real estate taxes, the county loses $107,000 in revenue. A one percent drop in personal property taxes translates to a revenue loss of $20,000.
The budget assumes that 97.5 percent of real estate taxes will be paid on time, and 93 percent of personal property taxes. But these figures emerged before the Corona pandemic hit with full force, and before Rappahannock County declared a State of Emergency.
“We’ve never seen anything like this,” says Hampton District Supervisor Keir Whitson. “I think our expectations are higher than they should be.” A Pew Research Center survey in April found that only 47 percent of Americans said they had enough of a financial cushion to cover three months of expenses. By the time Rappahannock’s yearend property and real estate taxes are due, some residents may have exhausted any available funds.
Shortfalls and contingencies
The worries about shortfalls in property and real estate taxes come on top of other revenue setbacks. Planners understand that some of the State of Virginia’s promised support may evaporate. They also have accepted that with businesses shuttered, revenue from sales taxes and meals and lodging taxes are plummeting.
In the Town of Washington, which operates a separate budget, meals and lodging taxes account for twothirds of the revenue. Before the pandemic, the town counted on about $375,000 a year from the Inn at Little Washington and smaller inns and bedand-breakfasts. When the pandemic emerged, the town cut the expectation for meals and lodging taxes in the fiscal year beginning in July to $276,000. As economic conditions worsened, the figure dropped to $200,000. A town official says the estimate is “still in play.” Meanwhile, the town’s other main revenue source— water and sewage fees— has plummeted to a quarter of normal levels because the local hospitality business has gone into hibernation. Spending is being slashed, including funds for refreshing the flower boxes in the town parking lot.
Broadly, the Board of Supervisors is sticking with most of the original spending targets set before the crisis, while managing the risks of falling revenue by setting some spending plans into contingency status. Under this approach, a program, payment or investment is fenced off as “contingent,” and will happen only when the supporting revenue is in hand. If the funds— whatever the source— don’t show up, the spending is suspended.
For now, revenue reductions from the blueprint presented March 11 are set at $483,437, out of a budget just over $26 million. Responding to the possibility that some additional revenue streams will be blocked, $503,472 of planned spending — including raises for teachers and other school workers and bonuses for county employees — is held in the contingency fund. Capital expenditures equaling $141,970 are frozen. What Whitson and others worry about is that more cuts will be needed.
For the decision-makers, it’s a matter of managing the pessimism as they wrap up budget plans for the new fiscal year. In April, a poll by the U.S. Chamber of Commerce concluded that 40 percent of the 30 million small businesses across the nation could fold in the next six months because of COVID-19. Any such scenario would require planners throughout the U.S. economy to prepare for the worst, identifying which priorities to protect as revenues vanish.
For Rappahannock’s budget planners, the situation is vexing: On the spending side of the balance sheet, items such as teachers’ salaries, fire-fighting equipment, law enforcement and child protection can be accurately calibrated. But on the revenue side, it’s a different story. County income from taxes and state and federal support is contingent on three large unknowns: the severity of a virus; the damage of an already deep recession, and the resilience of a population reeling from setbacks unimaginable just three months ago.
Budgetary quicksand
Currently, states, including Virginia, are working on blueprints for gradual or partial reopening of their economies. But with continuing COVID-19 infections, and no vaccine, economists warn of a lackluster bounce back for much of 2020. Doctors warn of a second wave of infections, as happened with the 1918 flu, which is estimated to have killed as many as 100 million people worldwide. The unknowns create a form of budgetary quicksand in which planning mutates into reacting, and spending commitments are only as good as the latest revenue projections. In a move that typifies the precarious times, the State of Virginia has '"unallotted" $143,000 of previously committed support, meant to be split between the county's general budget and the schools. The state's newly created 'unallottment" classification means simply that the money may come in, or may not.
Of course, the situation of predictable expenses and unpredictable revenue is the new universal, which governments, enterprises and families are navigating across the globe. But a small county government has fewer options. It can’t scale back its product lines as a company might. It can’t borrow on a massive scale in international markets as the federal government does, or on a national scale as a state government might.
A small county like Rappahannock is contingent in every direction — it is looking to local enterprises to survive and eventually prosper, and to pay their taxes. It is looking for landowners to cover real estate taxes, notwithstanding the financial body blows they’re absorbing. It is waiting for the Commonwealth of Virginia to support the schools, and for the federal government to support the social services. It wants the Treasury Department and Small Business Administration to respond to appeals for help under the pandemic rescue packages. And finally it’s looking to local nonprofits to fill in the gaps, with support for students and food for hungry families.
The circle of dependencies is nothing new. What’s different is that the pandemic is stressing every revenue source simultaneously, potentially setting off in each a chain reaction that erodes the country’s revenue base significantly.
Because the budget adjustments the supervisors embrace this week may be inadequate to respond to the actual drop in revenue, Curry will be monitoring the inflows and outflows, ready to present the supervisors with new urgencies and new options, as the course of the pandemic, and its effect on the local economy, evolve.
The pandemic is stressing every revenue sourer simultaneously. potentially setting off in each a chain reaction that erodes the country's revenue base significantly.